Another way to help your grandkids with college expenses (or indeed any kind of school fees, including private elementary and high schools) is a direct tuition payment. And if you, the grandparent, write a check directly to the school, there is no gift tax. So if you're willing and able to do this, just write the check when the tuition bill comes in.
I should point out here that this gift-tax exemption applies only to tuition payments, not the cost of room, board, travel and other expenses. However, since the tuition is not considered a gift, you're still able to give a grandchild an additional $12,000 per year without worrying about the gift tax.
INVESTING FOR A CHILD'S FUTURE
Another way you can invest in your grandchild's future is by opening a custodial account in his or her name with any broker-dealer. You can control the account or manage its investments until the child turns 18 or 21, depending on your wishes and the laws of your state - some states let you control the assets until the child is 25.
Again, you won't trigger a gift tax unless you give more than $12,000 per grandparent. Any child under age 19 will enjoy a small tax break: The first $900 of investment income is tax-free, and the second $900 is taxed at the child's rate for 2008. However, every dollar of investment income over $1,800 is taxed at the parents' marginal rate.
But here's the downside for college-bound children - custodial account assets are in the child's name, which means they'll count heavily in financial aid calculations. If you really believe your grandchildren will go to college, opening a 529 plan or paying tuition bills directly may make more sense.
FINANCIAL SUPPORT
Finally, grandparents can also assist their grandchildren by simply helping out with their children's finances. Pay for a vacation or day care, or perhaps even help with the down payment on a house. Most families with young children - especially if one spouse leaves the work force - face some financial challenges. You can help in some meaningful ways; however, unless the need is acute, I suggest investing in your grandchildren's future.
Consider opening 529 plans when they're young. Pay the tuition bill directly. Sending a child to college is one of the most effective ways to improve their earnings potential. And, of course, nurture their intellectual potential.